CORPORATE RESTRUCTURING 1 (OPTIONS AND INTERNAL)

CORPORATE RESTRUCTURING

Corporate restructuring is the process of redesigning one or more aspects of a company. The process of reorganizing a company may be implemented due to a number of different factors, such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction.

Restructuring a corporate entity is often a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company. For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as taking advantage of tax breaks that would allow the corporation to divert more revenue to the production process.

Corporate restructuring may take place as a result of the acquisition of the company by new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout. What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible before the takeover took place.

OPTIONS AVAILABLE FOR CORPORATE RESTRUCTURING

There are several possibilities under the law. They are –

INTERNAL REORGANIZATION UNDER CAMA:

This is an expedient option for a company experiencing economic hardship and whose liabilities outweigh its assets.  A compromise or an arrangement under Section 539 and 540 of CAMA is a veritable option in this regard.

ARRANGEMENT AND COMPROMISE (S. 537)

Compromise and arrangement are used interchangeably.  A compromise is essentially an arrangement by a Company with the creditors and/or the shareholders or a class of them to accept less than what they are ordinarily entitled to as full satisfaction of their obligation.  It may require the company to negotiate with the creditors and request that they relinquish their security or to permit the creation of a prior or parri pasu charge in favour of other creditors.  It is also possible under a compromise, for a company to persuade its creditors to accept shares or part shares and part cash, in satisfaction of their debt.

Alternatively or simultaneously sometimes, shareholders or a class of them may be convinced to vary their rights.  An agreement may be reached with ordinary shareholders to surrender part of their shares to preference Shareholders in lieu of dividend arrears.  Conversely, holders of preference shares may be persuaded to cancel accrued dividends or reduce the fixed rate of dividend or to accept the conversion of their preference shares to ordinary shares.

In extreme cases, a company may resolve to sell all or part of its shares or undertakings to another company or agree with another company to give majority of its voting power to it in consideration for shares of the other company being issued to its shareholders after which it may be wound up if it has no assets left.

PROCEDURE FOR ARRANGEMENT OR COMPROMISE

This is available under section 539 to section 540.

1.      A scheme of arrangement or compromise is prepared by the company, a member or members, creditor or creditors, or the liquidator where the company is being wound up.

2.      Application is made to the court in a summary way by the company or creditor or member of the company, or the liquidator if the company is being wound up, praying the court for an order that a meeting of the company or class of members or class of creditors be summoned in such manner as the court may direct – section 539(1).

3.      If the order is granted, then the meeting is convened accordingly. The notice of the meeting must be accompanied with a statement explaining the general effect of the arrangement, any material interest of the directors of the company and whether it would affect the directors differently from other persons. If it will affect debenture holders, the effect must give explanations. If the meeting is summoned by advertisement, it must contain the above statement or notice of where copies of such statement can be obtained by those entitled to attend the meeting – section 540(1) and (2).

4.      At the meeting, if a majority representing not less than three-quarters in value of the shares of members or class of members, or of the interest of creditors or class of creditors, as the case may be being present and voting either in person or by proxy, agree to the scheme, report shall be made to the court of the meeting – section 539(2).

5.      The court shall refer the scheme to the Securities and Exchange Commission, which shall appoint one or more inspectors to investigate the fairness of the scheme or compromise and make a report thereon to the court within the time specified by the court – section 539(2).

6.      If the court is satisfied as to the fairness of the scheme, it shall sanction it and it shall be binding on all creditors or the class of members of the company, and also the company or in the case of a company in the course of being wound up, on the liquidator and contributories of the company – section 539(3).

7.      An order made to sanction the scheme shall have no effect until a certified true copy of the order has been delivered by the company to the Corporate Affairs Commission for registration – section 539(4).

8.      A copy of every such order shall be annexed to every copy of the memorandum of the company issued after the order has been made – section 539(4).

ARRANGEMENT ON SALE UNDER Section 538 CAMA

This section empowers the members of a company to resolve by special resolution, in order to achieve an arrangement, that the company be wound up and that the liquidator be appointed to sell the whole or part of the company’s undertaking or assets to another company.  The consideration for such sale may be cash, shares or debentures which the liquidator will distribute proportionately to the members in accordance with their rights in liquidation.

PROCEDURE FOR ARRANGEMENT ON SALE

1.      A twenty-one (21) days notice must be sent to members and the notice must state a special resolution pursuant to section 358.

2.      The members in general meeting must pass a special resolution to –

(a)    Wind up the company voluntarily

(b)   Appoint and authorise the liquidator to carry out the sale and distribution.

3.      The liquidator will give effect to the resolution.

4.      A dissenting member may by notice addressed to the liquidator and deposited at the registered office or head office of the company within thirty (30) days of the resolution into effect or to purchase his own shares at a price to be determined either by agreement in the case of a private company in which foreigners do not participate or by Securities and Exchange Commission in the case of a public company or private company in which foreigners participate.

5.      Any sale or distribution in pursuance of the special resolution shall be binding on the company and on all members except a member who signified his dissent accordingly – section 538(2) and (4).

6.      The sanction of court shall be required for the arrangement to be valid if –

(a)    Within one year from the date of passing any special resolution as required, an order is made under section 310 to section 312 for relief on the grounds of unfairly prejudicial and oppressive conduct; or

(b)   Within one year from the date of passing any resolution as required, an order is made for creditor’s voluntary winding up – section 358(2)(a).

EFFECT ON CREDITORS

The positions of creditors is that they remain creditors of the transferor company and they have all the rights against that company that their debts confer.

It will normally be part of the arrangement that the transferee company agrees to meet the liabilities of the transferor company and gives an indemnity to this effect or, alternatively that the transferor company retains sufficient assets to meet its liabilities.

Where a creditor feels that the arrangement is causing a variation or abrogation of his rights, he can pursue an order for creditors’ voluntary winding up.

EFFECT ON SHAREHOLDERS

The position of shareholders is that the resolution and the distribution that may follow it are valid but that any shareholder may in specific circumstances dissent and require to be bought out.

However, no dissentient shareholder can be compelled to take interest in the transferor company as long as he signifies his dissent according to the Act.

REGULATORY BODIES

Some regulatory bodies have a role to play with the regulation of corporate reconstructuring. They are –

1.      Companies and Allied Matters Act.

2.      Investment and Securities Act.

3.      Securities and Exchange Commission.

COMPANIES AND ALLIED MATTERS ACT

This makes changes in provisions in respect of changes in and affecting the rights and liabilities of members or creditors of the company, or affecting the regulations of the company.

INVESTMENT AND SECURITIES ACT

This makes provisions regulating schemes of changes and reconstruction affecting two or more companies and specifically, where there is to be a transfer of the property or undertaking of one company to another.

Look-up – schemes of arrangement; reconstruction; compromise; arrangement and compromise; mergers; takeovers.

SECURITIES AND EXCHANGE COMMISSION

It is charged with the functions of anti-trust regulation and monopolies control. It also has the function to review, approve and regulate all forms of business organisations.

FLOATATION OF SECURITIES AND COLLECTIVE INVESTMENT SCHEMES

COMPANY SECURITIES

PUBLIC OFFER/SALE OF SECURITIES/COLLECTIVE INVESTMENT SCHEME; and CAPITAL MARKET AND PROCEDURE

COMPANY SECURITIES

The major characteristic of a public company is that it can offer its securities to the public for sale or subscription.

Section 315 of ISA defines security to mean –

(a)    Debentures, stocks or bonds issued or proposed to be issued by a government;

(b)   Debentures, stocks, shares, bonds or notes issued or proposed to be issued by a body corporate;

(c)    Any right or option in respect of any such debentures, sticks, shares, bonds or notes; or

(d)   Commodities futures, contracts, options and other derivatives as provided in the definition.

It should, however, be noted that ‘a futures contract’ is an agreement to buy or sell a standardised asset (such as a commodity, stock, or foreign currency) at a fixed price at a future time.

METHODS OF PUBLIC OFFER/SALE OF SECURITIES

There are several methods of public offer and sale of securities, but the major ones are –

1.      Direct offer;

2.      Offer for sale; and

3.      Placement.

DIRECT OFFER

This is also referred to as public offer. Under this, the company offers its shares (or debentures) to the public through an issuing house (usually a Bank or other. financial institution) by means of a prospectus (any written or electronic information, notice, advertisement or other forms of invitation offering to the public for subscription or purchase, any shares, debentures or other approved and recognised securities of a company and other issues or scheme). The risk of failure of the issue is born by the company which, in order to protect itself, arranges for the issue to be underwritten at an agreed commission by an issuing house. Thus, the risk of failure lies with the offeror of securities (the company) as the company could spend much more than they eventually got.

OFFER FOR SALE

This is where a company allots its shares or debentures to an issuing house which then invites the public to buy from it usually at a higher price. The risk of failure of the issue is born by the issuing house which usually will underwrite the issue.

An offer for sale needs a prospectus due to the fact that it is an invitation to the public.

PLACEMENT

This means that invitation is not made to the public whether directly or indirectly. The company sells its shares to an issuing house which offers (or places) the shares not to the public at large but to clients or institutional investors; or the company ‘places’ their shares with the issuing house and gives commission for every share sold e.g. Insurance companies and Pensions funds. The company pays brokerage (commission) to the issuing house.

COLLECTIVE INVESTMENT SCHEME

This is provided for under sections 153 and 315 of the Investments and Securities Act (ISA), 2007.

Under section 153 and 513, collective investment scheme is defined thus –

“a scheme in whatever form, including an open-ended investment company, in pursuance of which members of the public are invited or permitted to invest money or other assets in a portfolio, and in terms of which –

(a)   Two or more investors contribute money or other assets to and hold a participatory interest in a portfolio of the scheme through shares, units or any other form of participatory interest;

(b)   The investors share the risk and the benefit of investment in proportion to their participatory interest in a portfolio of a scheme or in any other basis determined in the deed, but not a collective investment scheme authorised by any other Act.

Thus, collective investment scheme is a scheme whereby members of the public are invited or permitted to invest money or other assets in a portfolio. The interest investors have is a participatory interest, and they are neither shareholders nor debenture holders.

NATURE OF COLLECTIVE INVESTMENT SCHEME

The scheme relates to some special types of arrangements whereby people pool their little resources together for profits such as those found in unit trusts and in local community contributions.

TYPES OF COLLECTIVE INVESTMENT SCHEME

Section 154 of the Investments and Securities Act provides for three types of the scheme namely –

(a)    Unit trust scheme; or

(b)   Open-ended investment company; or

(c)    Real Estate Investment Company or trusts.

UNIT TRUST SCHEME

This is an arrangement made for the purpose of providing facilities for participation of the public as beneficiaries under a trust, in profits or income arising from acquisition, management or disposal of Securities or any other property – sections 152 and 315 of ISA.

OPEN-ENDED INVESTMENT COMPANY

This is a company with an authorised share capital whose articles of association authorise the acquisition of its own shares structured in such a manner that it provides for the reissuing of different classes of shares to investors, each class of shares representing a separate portfolio with a distinct investment policy – sections 152 and 315 of ISA.

REAL ESTATE INVESTMENT COMPANY OR TRUSTS

This is defined under section 193(1) of ISA as “a body corporate incorporated for the sole purpose of acquiring intermediate or long term interests in real estate or property development, may raise funds from the capital market through the issuance of securities which shall have the following characteristics –

(a)    An income certificate giving the investor a right to a share of the income of any property or property development; and

(b)   An ordinary share in the body corporate giving the investor voting rights in the management of that body corporate.

ORGANS OF COLLECTIVE INVESTMENT SCHEME

These are –

1.      Manager.

2.      Holder.

3.      Issuer.

4.      Trustee.

5.      Custodian.

MANAGER

This is the person whom the powers of the management is vested relating to property for the time being subject to any trust created in pursuance of the scheme.

Section 155 of ISA states that the manager shall administer a collective investment scheme honestly and fairly, with skill, care and diligence; and in the interest of investors and the securities industry.

However, no person shall perform any act or enter into any agreement or transaction for the purpose of administering the scheme, unless such person is incorporated under the Companies and Allied Matters Act, and the person is registered as a fund or portfolio manager – section 155 of ISA.

The commission has the power the cancel the administration of a manager – section 174 of ISA.

DUTIES OF A MANAGER

Under section 157 of ISA, the duties of the manager of a scheme shall be to –

1.      Avoid conflict between the interests of the manager and the interests of an investor;

2.      Disclose the interests of its directors and management to the investor;

3.      Maintain adequate financial resources to meet its commitments and to manage the risks to which its collective investment scheme is exposed;

4.      Organise and control the scheme in a responsible manner;

5.      Keep proper records;

6.      Employ adequately trained staff and ensure that they are properly supervised;

7.      Have well-defined compliance procedures; and

8.      Promote investor education.

HOLDER

This is any investor or beneficiary who has acquired units of a collective investment and is entitled to a pro rata share of dividends, in trust or other income of the securities comprised in the unit – section 152 of ISA.

ISSUER

This is a person with the duties to perform that of a manager pursuant to the provisions of the trust deed or other agreement under which the units or securities are issued – section 152 of ISA.

TRUSTEE

This is a person registered by the Commission to so act, and in whom the property for the time being, subject to any trust created in pursuance of an approved scheme or operation, is or may be vested, in accordance with the terms of the trust – section 152 and 315 of ISA.

CUSTODIAN

This is a person who has custody as a bailee of securities or certificate issued in the investor’s name with the investor’s name appearing in the issuer’s register as the beneficial owner of the securities – section 152 and 315 of ISA.

APPOINTMENT OF CUSTODIAN OR TRUSTEE

A manager shall appoint either a trustee or a custodian for any scheme managed by it having regard to the structure of the scheme – section 178(1) of ISA.

A trustee or custodian intending to retire from an appointment shall give to the manager and the Commission not less than three (3) months notice, and during the said period of three (3) months, the manager concerned shall take steps to appoint another trustee or custodian to act as such – section 178(3) of ISA.

Only persons registered under the Commission as trustee or custodian can act as a trustee or a custodian – section 178(2) of ISA.

QUALIFICATIONS AND REGISTRATION OF TRUSTEE OR CUSTODIAN

The commission shall only register a person as trustee or custodian if the commission is satisfied that –

1.      The person is not in relation to the manager, either a holding company or a subsidiary or fellow subsidiary company within the meaning of those terms as defined in the Companies and Allied Matters Act; and

2.      The general financial commercial standing and independence of the person is such that it is fit for performing the functions of a trustee or custodian and that the person is by reason of the nature of its business sufficiently experienced and equipped to perform such functions – section 179(3) of ISA.

DUTIES OF TRUSTEE OR CUSTODIAN

A trustee or custodian shall –

(a)    Ensure that the basis on which the sale, repurchase or cancellation of participatory interest effected by or on behalf of a scheme is carried out in accordance with the Act and the trust deed or custodial agreement;

(b)   Ensure that the selling or repurchase price of participatory interests is calculated in accordance with this Act and the trust deed or custodial agreement;

(c)    Carry out the instructions of the manager unless they are inconsistent with this Act or the trust deed or custodial agreement;

(d)   Verify that, in transactions involving the assets of a scheme, any consideration is remitted to it within acceptable units of market price;

(e)    Verify that the income accruals of a portfolio are applied in accordance with the Act and the trust deed or custodial agreement;

(f)    Enquire into and prepare a report on the administration of the scheme by the manager during each annual accounting period, in which it shall be stated whether the scheme has been admitted in accordance with the provisions of this Act and the trust deed or custodial agreement – section 181(1) of ISA.

Section 181(2) and (3) of ISA stated additional duties which are –

A trustee or custodian shall report to the manager any irregularity or undesirable practice, concerning the collective investment scheme of which it is aware; and he shall satisfy itself that every income statement, balance sheet or other return prepared by the manager in terms of section 169 fairly represents the assets and liabilities, as well as the income and distribution of income, of every portfolio of the scheme administered by the manager.

At the request of the trustee or custodian, every director or employee of the manager shall submit to the trustee or custodian any book or document or information relating to the administration by the manager of its collective investment scheme which is in its possession or at its disposal, and which the trustee or custodian may consider necessary to perform its functions – section 181(4) of ISA.

LIABILITY OF TRUSTEE OR CUSTODIAN

Under section 168 of ISA, any provision in the trust deed or custodial agreement is void if it has the effect of exempting the trustee or custodian from or indemnifying it against liability for breach of trust or where he fails to exercise the care and diligence required of it as trustee or custodian.

Section 183 of ISA went further to state that the trustee or custodian of a scheme shall indemnify the manager and investors against any loss or damage suffered in respect of money or other assets in the custody of the trustee or custodian and which loss or damage is caused by the negligent act or omission of the trustee or custodian.

CREATION AND MANAGEMENT OF COLLECTIVE INVESTMENT SCHEME

1.      The manager, trustee or custodian must –

(a)    Obtain incorporation under the Companies and Allied Matters Act (CAMA).

(b)   Register with Securities and Exchange Commission (SEC).

(c)    Have the capital and reserve fund as may be prescribed by the SEC – section 160(3)(b) of ISA.

2.      Preparation of Trust Deed or Custodian Agreement in compliance with the Act and regulations of the SEC – section 160(3)(d) of ISA.

3.      Registration of the Scheme. For the scheme to be carried on, it must be authorised by and registered with the SEC – section 160(1) of ISA.

4.      Registration of Units or Securities. It is unlawful for any person to deal in units or securities of a scheme unless they are duly registered with the SEC – section 161 of ISA.

5.      Approval of prospectus and other offer documents of the scheme. Any letter, notice, circular or document prepared by the manager for the purpose of offering units or securities of a scheme to the public must be approved by the trustee or custodian, and submitted to the SEC for approval before such letter, notice, circular or document is published – section 164 of ISA.

6.      Determination of market price. A unit or security must be valued at its fair market price and the SEC may by regulation prescribe the mode and method of determining the fair market price – section 170 of ISA.

7.      Investment of a collective scheme. A scheme fund must be invested by a manager in accordance with the provisions of the trust deed or custodian agreement with the objectives of safety and maintenance of fair returns on amounts invested – section 171(1) of ISA.

8.      A manager may invest the funds and assets of a scheme in units of any investment funds, provided that such investment fund may only be invested in the categories of investments set out in real estate.

9.      The SEC may, by regulation, impose additional restrictions on investments by a manager where such additional restrictions are imposed with the objects of protecting the interest of scheme or its beneficiaries.

10.  For the purpose of complying with any guideline set by the SEC as to the quality of instruments and banks that scheme fund assets may be invested in, and to ensure the safety of scheme assets in general, a manager shall have due regard to the risk rating of instruments that has been undertaken by a rating company registered under ISA – section 171 of ISA.

ROLES OF SOLICITOR IN PUBLIC OFFER OF SECURITIES

The roles of a solicitor in public offer and sale of securities are –

1.      Ensuring the company is a public company. If it is a private company, the solicitor must ensure the proper procedure is followed to convert the company from private to public company.

2.      Ensuring that the shares to be issued are within the nominal share capital of the company. If necessary the nominal share capital of the company may be increased to accommodate the new issue.

3.      Ensuring that necessary application and returns are made to the Corporate Affairs Commission in case of conversion of a private company to public company or increase in the capital of the company.

4.      Making sure that shares to be issued are registered with the Securities and Exchange Commission.

5.      Advising on whether the issue is such that will require full prospectus, abridged prospectus or falls within the provided exemptions will not need prospectus.

6.      Ensuring that any prospectus issued make all the required disclosures.

7.      Advising on any on-going or threatened litigation or claim(s) the outcome of which may adversely affect the fortune of the company.

8.      Getting all written consent, including his own and that of other experts that may be mentioned in the prospectus.

9.      Drafting and registration of prospectus and also ensuring the prospectus carry the signature of all directors named in the prospectus as directors.

10.  Investigating and ensuring all parties to the issue hold a current and subsisting registration with the Securities and Exchange Commission.

11.  Making sure there is no untrue or misleading statement in the prospectus.

12.  Advising on the opening of subscription lists before any allotment.

13.  Ensuring that allotment is not made unless minimum subscription has been achieved.

14.  Advising that application money be held in trust in a separate account as deposit by the issuing house.

15.  Advising on the allotment.

16.  Advising on when to return money in case of over subscription.

17.  Preparing, perusing, and making sure all material contracts are duly approved and executed.

18.  Seeking the initial and final approval of the Securities and Exchange Commission and the Stock Exchange to the issue.

19.  Advising the company on the listing rules of the Stock Exchange.

20.  Ensuring that the issue conforms to all necessary laws and regulations, that is, Companies and Allied Matters Act (CAMA), Investment and Securities Act (ISA), listing requirements of the Securities and Exchange Commission (SEC), and the Nigerian Stock Exchange (NSE).